Analysts’ views vary on LafargeHolcim deal

News that Holcim and Lafarge have approved plans to merge, forming LafargeHolcim, has been met with various reactions by analysts and cement insiders alike. The most common response is to question whether in fact the merger will be allowed, given the ongoing antitrust investigations in the UK, Europe, Brazil and India, among others.

Ongoing antitrust investigations

Holcim is in the process of an asset swap with Cemex in West Germany and Spain that is under the scrutiny of the European Competition Commission, which has warned that the transaction might reduce competition in parts of Germany and Belgium. Holcim, Lafarge and others are also under investigation by the commission for allegations of cartel behaviour in a case that began in 2010. In India, cement companies are still in the appeals process for a decision in 2012 that resulted in fines of Rs.6307 crore across 11 companies after they were found guilty of collusion to fix prices. Meanwhile, more recently, Holcim was among six companies in Brazil accused of cartel behaviour. In addition to a 508 million reais fine, it was proposed that Holcim shed 22% of its capacity in the country, where Lafarge also operates. According to Ian Osburn, an analyst at Cantor Fitzgerald who is quoted across several reports on the merger, there are currently 11 investigations into the building materials industry worldwide – the announcement of this merger will likely add to that.

Preemptive divestments

In anticipation of such a reaction, Holcim and Lafarge have announced plans to sell US$8 billion of assets around the world. Though no specifics have been announced, the companies have indicated that sales will be largely concentrated in Europe where demand is subdued. Bruno Lafont, Lafarge CEO, also told reporters that the companies would immediately enter discussions with the European Commission and other regulators ‘in a constructive spirit’. He added that there were no plans for plant closures, and the impact on employment would be ‘limited’.

Analysts unconvinced

Thus far, analysts appear to be sceptical about the appeal of the merger, though share prices for both companies rocketed over the weekend. Phil Roseberg at Bernstein Research told The Wall Street Journal, “We don’t see upside beyond savings on overheads and consider the risks to be substantial”. The same article quoted an analyst from UBS AG as saying that they expected the approvals process to take up to two years. Kevin Cammack, analyst at Cenkos, is quoted in the Financial Times, saying: “It’s possible that the drive towards the merger comes from shareholders rather than managers…They may want a solution to the debt problem rather than just taking their dividends year after year and waiting for their debt to come down.” Mr Osburn appears to agree; in the same FT article he is quoted as saying: “After two years of cost cutting and little real marginal growth, the management may be thinking again to prepare for the expected upturn. Most of the low profit assets are in Europe where most of the antitrust assets would need to be sold, so it’s a good catalyst for them to make those divestments.” However in an FT interview with Bruno Lafont and Rolf Soiron, outgoing Holcim chairman, the reporters say the two executives ‘insisted the deal was not a defensive move in response to an industry suffering from chronic overcapacity’. They quote Mr Lafont, who says: “The merger is focused on creating a growth platform. It is not about restructuring. It is a post-restructuring vision”.

Cement expert upbeat

Imran Akram, chief executive at IA Cement, was noticeably more upbeat about the deal when we spoke to him. "Both companies are to be congratulated on this game-changing step to create the ultimate merger in cement," he said. "The disposal process actually represents a golden opportunity for regulators to introduce new players and increase competition in their cement markets. I think they will welcome the deal and enforce significant disposals. This will suit LafargeHolcim, who will then be able to reduce their debt levels and begin to pursue expansion projects in new markets. This in itself is likely to be very welcome after years of cost-cutting and retrenchment. The disposals will also lead to an unprecedented shake-up of industry structure. Many emerging market cement companies could be in a position to purchase mature market assets. The cement industry just became even more exciting!"